Deloitte Insights Video

Ecosystems, or communities of diverse participants who create greater value through sophisticated models of collaboration and competition, are complex and often confusing, but leaders who understand how to work within these dynamic and adaptive environments can attract passionate communities of participants and reap enhanced business value.

Core systems can be a jumping-off point for enterprise innovation, or the very thing that halts growth in its tracks. In this Tech Trends video, Mark White, CTO at Deloitte Consulting LLP, discusses the questions CIOs should ask themselves in pursuing the rebirth of core IT assets.

More organizations are turning to crisis simulations to test their ability to respond to unexpected events. When well-planned and executed, these exercises provide participants with a realistic sense of their roles and responsibilities during a crisis and help to reveal blind spots. Four organizations from different industries that have undertaken crisis simulations in recent years share lessons they’ve learned and benefits they’ve derived from the experience.

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Many traditional supply chains are becoming less linear than their name implies, evolving instead into complex “value webs” that bring together entire ecosystems of suppliers and collaborators. Value webs can cut costs, boost service levels, mitigate risks of disruption, and deliver enhanced opportunities for innovation.

Ecosystems, or communities of diverse participants who create greater value through sophisticated models of collaboration and competition, are complex and often confusing, but leaders who understand how to work within these dynamic and adaptive environments can attract passionate communities of participants and reap enhanced business value.

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In Defense of the Theory of Disruptive Innovation

Jill Lepore’s recently published argument against disruptive innovation theory is undermined by her failure to grasp three facts, according to Deloitte Services LLP director Michael Raynor.

Clayton Christensen’s theory of disruptive innovation made its big debut in a 1995 Harvard Business Review article called “Disruptive Technologies: Catching the Wave.”¹ His foundational work on the theory of disruptive innovation, “The Innovator’s Dilemma,” took off in 1999 when Andy Grove, then CEO of Intel, appeared next to Christensen on the cover of Forbes. Consonance between disruptive innovation and the dot-com boom made the concepts, and Christensen, part of the business community’s zeitgeist.

(Full disclosure: I worked with Christensen closely for the first time as a participant in a doctoral seminar he led. In 2002, he asked me to collaborate with him on “The Innovator’s Solution,” the follow-up to “The Innovator’s Dilemma,” published in 1997.)

In a nutshell, companies that “disrupt” their competitors develop new business models in unrelated markets that are built around different technologies. They ride the wave of improvements in those technologies and, as the performance and cost of their solutions improve, they eventually intersect with the requirements of customers in incumbents’ home markets. To the extent that the entrant is successful, it has followed a disruptive path to that success.

Disruption theory, like any good theory, has remained a work in progress. With its limits being constantly tested, the theory has matured into a core set of concepts without slipping into an ossified orthodoxy. The result has been a growing and increasingly useful body of work that has helped a generation of managers pursue innovation-driven growth more effectively.

Even so, a countermovement seeks to discredit disruption rather improve it by identifying and correcting its flaws. The latest in this line is Jill Lepore’s “The Disruption Machine,” which appeared in The New Yorker on June 23, 2014.² A seasoned social critic with a strong track record, Lepore unfortunately attacks only a caricature of the theory, ignoring at least three dimensions of the debate about disruption that are crucial to understanding the topic.

Disruption is a theory of success, not failure. Lepore makes two common but avoidable errors when she describes disruptive innovation as “the selling of a cheaper, poorer-quality product that initially reaches less profitable customers but eventually takes over and devours an entire industry.” First, disruptive innovations need not start with cheaper, poorer-quality products, nor with less profitable customers. Disruptive innovations can also get their start in entirely new markets, quite independent of the characteristics of the customers or markets in question. All that is required is that the disruptor’s foothold market be relatively unattractive to incumbents. Second, a successful disruption does not require the devouring of an industry or even the bankruptcy of its incumbents. When Lepore says that “Disruptive innovation is a theory about why businesses fail,” she is confusing the puzzle that motivated the original research (how do successful incumbents end up going bust?) and the rhetoric used to popularize it (watch out for disruptors!) with the substance of the theory itself. Disruption is, in truth, a theory of how to enter new markets successfully by sneaking up on them rather than via frontal assault.

Defining success is tricky business. A line of criticism that is central to Lepore’s attack is that Christensen’s disruptors were not truly successful while those companies that were disrupted were not truly failures. In his study of the disk drive industry, Christensen defined “success” as reaching $50 million in revenue in constant 1987 dollars for any year between 1977 and 1989, regardless of subsequent growth or decline. Lepore refers to this, dismissively, as an “arbitrary definition,” but never explores whether the definition is in any way inappropriate. Any definition of success is necessarily arbitrary, but that doesn’t negate the requirement by the theorist to put forth a carefully considered definition and then clearly communicate it. Reasonable people can disagree, but the general acceptance of a theory will be a function of the definitions offered and the robustness of the findings according to those definitions. Christensen’s work has repeatedly passed the most stringent tests of peer review and practical application, and it is on that basis that the utility of his definition should be judged.

Disruption theory is not the culprit for the Great Recession. A good deal of Lepore’s argument is based on what she claims is disruption’s rhetoric of destruction and the ill that has been wrought by our culture’s obsession with being disruptive. Central to this claim is that “when the financial services industry disruptively innovated, it led to a global financial crisis.” While subprime mortgages, collateralized debt obligations, and mortgage-backed securities might well have been innovative, they were not disruptive. Some of these products were sold to a previously untapped customer base, as Lepore claims, but it was not a smaller or less lucrative one. Moreover, the sellers did not use a new business model, nor were they propelled by an enabling technology. In other words, none of the innovations Lepore sees as having caused the Great Recession were consistent with the theory of disruption.

Truth arises, said David Hume, from disagreement among friends. An ever-widening community of researchers and practitioners see merit in disruption theory, understood as a carefully researched and tested set of ideas. The theory has matured tremendously over the last 20 years, thanks to disagreements among the members of that community who are friends, sometimes of each other, and always of the search for an ever-improving theory of disruptive innovation. In contrast, attacks based on misrepresentation and misunderstanding tend to create far more heat than light.